the missing tool in asset allocation

Prudent investors understand that it is essential to diversify their portfolio through an asset allocation that balances growth, liquidity and safety; bearing in mind their risk appetite and investment horizon. When it comes to stocks, most advisors recommend diversifying funds with different market capitalizations, investment styles, sectors, or themes. They can easily advocate the SIP or Systematic Transfer Plan (STP) route as it allows for regular and disciplined investments and leverages Rs cost averaging to your advantage. However, in terms of debt, is the same rigor required? Investing in debt deserves to benefit from a nuanced allocation strategy and investment regularity, as is generally practiced for equity funds. The Liquidity category focuses on meeting emergency needs, a need that overnight and liquid funds can easily satisfy. The Core tranche is intended to provide stability and security throughout the chosen investment period and often constitutes a substantial part of an investor’s bond allocation. Funds that invest primarily in the highest quality instruments with low to moderate maturity profiles should be chosen here. The Satellite tranche aims to generate “extra” yield and may take on greater duration or credit risk depending on market cycles. Actively managed gilts, dynamic bond funds, and credit risk funds or funds that do not have primarily AAA-rated paper can be chosen in this category.

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With the growing popularity of SIPs, the use of this disciplined method for regular investing seems surprisingly inclined. Industry data suggests the overwhelming proportion of SIP flows are directed to equity assets, with debt accounting for less than 5% of monthly flows. A simple solution to ensure that your targeted asset allocation is always maintained is to plan your SIPs not just in stocks. oriented funds, but also in bond funds. Systematic investments in fixed income securities (SIFIs) could help generate relatively better risk-adjusted returns and may aim to cushion the impact of increased volatility in equity markets. By balancing risk and maintaining your targeted allocation, portfolio drawdowns will be shallower, helping investors resist any behavioral urges to take unwarranted actions like suspending SIPs or redeeming, thereby staying invested longer. This in turn will help their portfolio have a relatively better chance of achieving the targeted return. Let’s look at an illustration to see how this might work. Suppose an investor is aiming for a 60/40 split between equity and debt. As the table shows, a combination of Equity SIP and systematic fixed income investing can be a powerful technique for navigating through market uncertainties while maintaining an appropriate long-term target asset allocation. As expectations of rising global and domestic interest rates rise, SIFI can help you average your cost of buying in what can be a volatile environment for debt yields. Systematically investing in debt mutuals plays an important role in balancing allocations and helping you stay invested over the long term.

Vishal Kapoor is CEO of IDFC AMC.

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